Rental Property Purchase Question

[oldtoyota]

I have many questions about this.

1. Are lenders looking for how much liquid money I have before letting me buy a home for rental purposes?
2. Is it better to live in the future rental house for a while? I noticed my neighbor lived in his house for a week or two. I presume this was to get a better mortgage rate? Is that likely?
3. Any suggestions for books?
4. Is it crazy to buy a rental home in a high COL area like DC? My main question here is how would I even make money?
5. How much does one advise I have on hand to pay for repairs, bad tenants, etc? (In the event I even need it.)

[arebelspy]

I have many questions about this.

Post away!

1. Are lenders looking for how much liquid money I have before letting me buy a home for rental purposes?
2. Is it better to live in the future rental house for a while? I noticed my neighbor lived in his house for a week or two. I presume this was to get a better mortgage rate? Is that likely?
3. Any suggestions for books?
4. Is it crazy to buy a rental home in a high COL area like DC? My main question here is how would I even make money?
5. How much does one advise I have on hand to pay for repairs, bad tenants, etc? (In the event I even need it.)

1. They want to see that you have the down payment in an account seasoned (2 mo typically).  Once you're past 4 properties they typically also want 6 mo. PITI reserves for each property, including the new one.

2.  If you buy it as owner occupied, you need to live there.  Getting an owner occupied loan knowing you will turn it into an investment loan and living there a week and moving is fraud.  Typically the number I see to be more comfortable is at least a
year.  I don't bother, I just get investment loans.  The rate is a bit higher.

3. Yes, lots.  Search the forums for real estate book recommendations, there have been several threads about it.  A good beginners book I typically recommend is Building Wealth One House at a Time by John Schuab.  It gives a good overview of owning rental properties, and then I have other book recommendations from there.

4. Probably.  You'd be speculating on appreciation, and likely losing money every month (negative cash flow).

5. Amount of reserves needed depends on the property, your situation (i.e. if you cash flow lots from a stable job and can pay the mortgage even when it's vacant, you're in a bit more comfortable position than someone living paycheck to paycheck in a company that's going through layoffs).  Either way you probably want some reserves, but it depends on the situation.

[oldtoyota]

I have many questions about this.

Post away!

1. Are lenders looking for how much liquid money I have before letting me buy a home for rental purposes?
2. Is it better to live in the future rental house for a while? I noticed my neighbor lived in his house for a week or two. I presume this was to get a better mortgage rate? Is that likely?
3. Any suggestions for books?
4. Is it crazy to buy a rental home in a high COL area like DC? My main question here is how would I even make money?
5. How much does one advise I have on hand to pay for repairs, bad tenants, etc? (In the event I even need it.)

1. They want to see that you have the down payment in an account seasoned (2 mo typically).  Once you're past 4 properties they typically also want 6 mo. PITI reserves for each property, including the new one.

2.  If you buy it as owner occupied, you need to live there.  Getting an owner occupied loan knowing you will turn it into an investment loan and living there a week and moving is fraud.  Typically the number I see to be more comfortable is at least a
year.  I don't bother, I just get investment loans.  The rate is a bit higher.

3. Yes, lots.  Search the forums for real estate book recommendations, there have been several threads about it.  A good beginners book I typically recommend is Building Wealth One House at a Time by John Schuab.  It gives a good overview of owning rental properties, and then I have other book recommendations from there.

4. Probably.  You'd be speculating on appreciation, and likely losing money every month (negative cash flow).

5. Amount of reserves needed depends on the property, your situation (i.e. if you cash flow lots from a stable job and can pay the mortgage even when it's vacant, you're in a bit more comfortable position than someone living paycheck to paycheck in a company that's going through layoffs).  Either way you probably want some reserves, but it depends on the situation.

Thank you! The above is helpful.

The past two people who have bought the house next door lived there for what seemed like a few hours (really weeks or maybe a few months) and then left. A real estate agent once told me that "intent" is what mattered, but doing that sounds fishy to me. From what you say, it sounds like getting an investor loan won't cost too much more. Good to know.

I will look for that book in the library.

I'm glad you mentioned "seasoned." A mortgage lender I spoke to referred to that. After I hung up, I realized I did not know how long counted as "seasoned." I have a ways to go on saving up to do this, yet I figured I'd get started on the initial research now.

[arebelspy]

The past two people who have bought the house next door lived there for what seemed like a few hours (really weeks or maybe a few months) and then left. A real estate agent once told me that "intent" is what mattered, but doing that sounds fishy to me.

Right, and if they genuinely intended to live there, then had a job loss and immediately decided to move to a cheaper place and rent it out, that's possibly I guess, though very unlikely.

It's doubtful they'll ever be called on it, but it is fraud, taking out the owner occupied loan with the intention of renting it out (and trying to live there a very short amount of time just to pretend you intended to occupy it).

I wouldn't do it personally.  But I also try to pay all the taxes I need to.

Perhaps they were just living there while rehabbing it, but had no loan, or it was an investor loan.